PROFITS UNDER MEDICARE DROP

By Spencer RichJanuary 18, 1988

Hospital profits under Medicare's new flat-payment-per-case system dropped from 14 percent of revenues in 1984 and 1985 to 8.2 percent in 1986 and are expected to plunge to as low as 2 percent in 1987 and "below zero" in 1988, according to calculations by a key government agency that studies hospital economics.

The calculations were made by the staff of the government's Prospective Payment Assessment Commission (PROPAC), created by Congress in 1983 to study issues involving Medicare payment rates. The commission is headed by Stuart Altman, dean of Brandeis University's Heller graduate school.

The new figures, presented at a recent PROPAC meeting, suggest a complete turnaround in hospitals' profitability from inpatient Medicare cases in the past several years.

"This downturn is even worse than we feared and predicted," said a spokesman for the Federation of American Health Systems, which represents more than 1,000 for-profit hospitals.

In 1984, a new system of paying hospitals for Medicare patients was instituted to try to hold down costs. Instead of reimbursing a hospital for all its costs for Medicare patients, the government paid hospitals a pre-fixed, flat fee for each type of illness. Hospitals that could keep costs less than the fee made money; those that did not lost money.

In studies that shocked Congress, PROPAC, Health and Human Services Inspector General Richard P. Kusserow and the Congressional Budget Office estimated that during the fixed-payment system's first two years, hospitals realized profits of about 14 percent on its Medicare revenues. About 40 percent of hospital days are for Medicare patients.

Hospital industry spokesmen disputed the 1984-85 figures, arguing they were overstated because Medicare, under existing law, does not pay its fair share of the costs of charity care and bad debts or of the real costs of caring for Medicare patients.

PROPAC's figures show that even by the method the hospitals challenged, profits on inpatient Medicare operations are plummeting.

PROPAC said hospital costs per case for Medicare have been rising about 10 percent a year while Congress has been raising rates paid to hospitals for Medicare patients only a few percentage points a year. In addition to calculating profits of 8.2 percent of revenues in 1986, PROPAC projected that when all the figures are in for 1987, they will be "about 2 percent."

And while "predicting 1988 is mostly guesswork," PROPAC said it appeared "the average . . . margin will fall below zero."